Is now a good time to buy TIPS?

[OhSoClose]

I am subscribing to the Treasury's Daily Bulletin on Treasury Inflation Protected Securities (TIPS). Today, the "Real Yield Curve Rates" range from 3.15% on the 20 year TIPS to 3.82% on the 7 year TIPS.

Does the "Real Yield Curve Rate" reflect the expected yield for the TIPS on top of inflation? If so, that 3.82 looks mighty good, almost up to a 4% SWR.

Do you think this is a good time to create a TIPS ladder?

Thanks for any insight you might have ----

OhSoClose

[haha]

Quote:

Originally Posted by OhSoClose I am subscribing to the Treasury's Daily Bulletin on Treasury Inflation Protected Securities (TIPS). Today, the "Real Yield Curve Rates" range from 3.15% on the 20 year TIPS to 3.82% on the 7 year TIPS. Does the "Real Yield Curve Rate" reflect the expected yield for the TIPS on top of inflation? If so, that 3.82 looks mighty good, almost up to a 4% SWR. Do you think this is a good time to create a TIPS ladder? Thanks for any insight you might have ---- OhSoClose

Can you give me a link so I can get this too? If I can see it, I can try to answer your question.

If these yields are available, that would be a great place to re-balance to if we shoud get a very strong equity rally soon.

Ha

[Lsbcal]

I've never seen TIPS at such good buy in rates. Here is a good source for the rates: Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com

This year the ride has been very wild. Supposedly the high rates are due to liquidity issues for some sellers, many hedge funds I guess. Probably these great rates will not last.

[youbet]

Would there be any way to harvest these attractive yields by buying a inflation protected bond fund or the ETF TIPS? Or would you have to buy Treasury issued individual bonds?

[OhSoClose]

Here is the link:
U.S. Treasury - Daily Treasury Yield Curve

[socca]

Quote:

Originally Posted by youbet Would there be any way to harvest these attractive yields by buying a inflation protected bond fund or the ETF TIPS? Or would you have to buy Treasury issued individual bonds?

I own the Vanguard TIPS fund, which has dropped substantially over the last few weeks. For technical traders, it may be in the 'buy' zone right now. I would have to re-familiarize myself with how TIPS work before speculating on their desirability based on the fundamentals.

[LOL!]

I bought the Vanguard TIPS fund last week. It's down 5% in a few days. I intend to buy more this week. But you gotta know that TIPS are not safe. They are very volatile and can lose money. These facts don't seem to get pointed out very often.

[OhSoClose]

I understand that the TIPS funds can be volatile, but I don't really understand how individual TIPS bonds are not safe, particularly if you plan to buy and hold to maturity.

This just seemed too good to pass up. I bought $60k of the Vanguard TIPS fund this morning.

[SteveL]

Acting on my own advice, I bought 25k of the 2017 maturity issue. It was priced to yield 3.35% plus inflation to maturity. With all this money being floated by the govt, the long term effect has to be more inflation. In any event, a true 3.35% yield after inflation is just fine.....
Only buy these in a tax-deferred account. Otherwise you have to pay tax on the inflation adjustment even though you don't have the cash.

[haha]

I think these rates are a gift. Too bad I have almost no liquidity.

Ha

[Lsbcal]

Quote:

Originally Posted by LOL! I bought the Vanguard TIPS fund last week. It's down 5% in a few days. I intend to buy more this week. But you gotta know that TIPS are not safe. They are very volatile and can lose money. These facts don't seem to get pointed out very often.

I think LOL means you can temporarily loose money in TIPS. I have recently as my buy in points are significantly under the current yields. So that is a volatility issue and not really safety issue. It could only be a safety issue if you did not match your needs for the money to the duration and maturity of the bond. When you buy an individual TIPS you basically have a safe US govt contract that pays the coupon times the inflation adjustment twice a year. You have a bond that can be long term and protects against unexpected inflation.

At the end you will get at least your principle back -- even if we had years of deflation you will get your principle back. If you buy a 10yr TIPS it is very unlikely that we will have deflation during a significant part of those 10 years. My opinion is that it is very likely we will have mild to high inflation overall in the next 10 years. There is a bias towards growth in the US so government and the Fed will do what they have to do to get people back to work and pump the economy. Not a good situation for long term nominal bonds but works OK for TIPS.

P.S. This graph of the 10yr TIPS shows the current spike. It could come down as fast as it went up: http://research.stlouisfed.org/fred2/series/DFII10/46

[In-control]

So let me ask a simple ? I can get a 5yr CD @~5% guaranteed with FDIC insurance - why would I buy a TIPS bond?

[harley]

Quote:

Originally Posted by In-control So let me ask a simple ? I can get a 5yr CD @~5% guaranteed with FDIC insurance - why would I buy a TIPS bond?

I'm a bond moron and even I can answer that one. After taxes your CD will only return 70-80% of that 5%, and they aren't inflation indexed. If rates go up to say 10% (I've personally seen them much higher than that) the TIPS will blow your CD out of the water.

[FIRE'd@51]

I admit to having been baffled by the TIPS spread lately and have posted so on other threads. According to Bloomberg, the real rate on the 5-yr TIPS is actually above the nominal rate on 5-yr Treasuries, which implies a negative break-even inflation rate (i.e. deflation), and longer-term (10-20 years) break-even inflation rates are about 1%.

Here is an interesting Morningstar article that talks about this. Basically, the part of it that makes some sense to me is that it's the result of hedge funds being forced to unwind long TIPS - short Treasuries trades, which has tended to raise real rates on TIPS, while, at-the-margin tending to depress nominal rates on Treasuries.

I would agree that this seems to be a good time to be a buyer of TIPS.

[In-control]

Quote:

Originally Posted by harley I'm a bond moron and even I can answer that one. After taxes your CD will only return 70-80% of that 5%, and they aren't inflation indexed. If rates go up to say 10% (I've personally seen them much higher than that) the TIPS will blow your CD out of the water.

It is my understanding the TIPS are not tax exempt. Below is the Treas. departments overview of TIPS. If they were then its a no brainer. You are right if the rates go above the CD rate then they loose. Otherwise it's a straight forward comparision 3% v.s. 5%/yr.

U.S. Treasury - Office of Domestic Finance - Treasury Inflation-Indexed Securities (TIPS)

[harley]

Quote:

Originally Posted by In-control It is my understanding the TIPS are not tax exempt. Below is the Treas. departments overview of TIPS. If they were then its a no brainer. You are right if the rates go above the CD rate then they loose. Otherwise it's a straight forward comparision 3% v.s. 5%/yr. U.S. Treasury - Office of Domestic Finance - Treasury Inflation-Indexed Securities (TIPS)

Well, like I said, I'm a bond moron.

[RustyShackleford]

Quote:

Originally Posted by lsbcal I At the end you will get at least your principle back -- even if we had years of deflation you will get your principle back.

This is a little misleading. If you buy TIPS on the secondary market
(i.e. through a broker like Schwab), which you probably want to do
since you want to capture these amazing YTMs and not just hope they're
still around when the Treasury conducts auctions), they will tend to have
an "inflation factor" built in. I just bought (on the 2nd'ary market) some
of the 20-year TIP maturing in January 2025. If you look at:

Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com

... you will see that this bond has an inflation factor of about 16%
(the "accrued principal" on $1000 par is about $1160).

This means that deflation can cause this $1160 to retreat to $1000.
So although you get the "par" principal of $1000 back at maturity,
you are NOT guaranteed to get back the inflation-adjusted principal
you may have paid on the secondary market. Capische ?

Also, the par floor does not apply to coupon payments.

P.S. I DO think it's a good time to buy TIPS. But do beware this
deflation potential. I wish I'd fully comprehended this and bought
something with a similar maturity date and YTM but a much smaller
inflation factor. You live and you learn.

[Lsbcal]

What I said was that you'd get your principle back at maturity. As you point out Rusty, if we have several years of deflation then the inflation adjustment will decrease. At maturity it will never be less then 1.00. Several years of deflation is IMO very unlikely but several months, well it could happen. That is why the shorter term TIPS might be a bit more of a gamble. Even at 6% for the Jan 2010 I'm hesitant to go for it because of this. Going out to 10years, do you really believe the inflation rate during this time will be 0.85% ? The market is pricing this in right now but it's a ridiculous inflation rate IMO. Just a few months ago TIPS were way down and the breakeven rate (roughly the guess at the inflation rate for 10yrs was as high as 2.5%): Bloomberg.com: Investment Tools

Also from a conversation above, I only purchase TIPS in my retirement account. Otherwise you will have to pay on the phantom income in a taxable account.

[FIRE'd@51]

Quote:

Originally Posted by RustyShackleford This is a little misleading. If you buy TIPS on the secondary market (i.e. through a broker like Schwab), which you probably want to do since you want to capture these amazing YTMs and not just hope they're still around when the Treasury conducts auctions), they will tend to have an "inflation factor" built in. I just bought (on the 2nd'ary market) some of the 20-year TIP maturing in January 2025. If you look at: Treasury Inflation-Protected Securities (TIPS) - Markets Data Center - WSJ.com ... you will see that this bond has an inflation factor of about 16% (the "accrued principal" on $1000 par is about $1160). This means that deflation can cause this $1160 to retreat to $1000. So although you get the "par" principal of $1000 back at maturity, you are NOT guaranteed to get back the inflation-adjusted principal you may have paid on the secondary market. Capische ? Also, the par floor does not apply to coupon payments. P.S. I DO think it's a good time to buy TIPS. But do beware this deflation potential. I wish I'd fully comprehended this and bought something with a similar maturity date and YTM but a much smaller inflation factor. You live and you learn.

Rusty,

I am curious why you chose the particular TIPS that you did, because I have been wrestling with some of the same issues. My inclination would have been to buy the most recent issue ( the 1.75% of 2028 ), on the assumption (perhaps incorrect) that it would be the most liquid, in addition to having the lower "inflation factor". Did you find the one you bought to be more liquid? Or did you want the higher-coupon issue which would presumably exhibit somewhat less price-volatility (although more reinvestment risk) since it has a smaller "zero coupon" component?

I have never bought TIPS in the secondary market, only at auction, although I have sold them in the secondary market, and have been somewhat disappointed (but not surprised) by the transaction costs.

[In-control]

I just read thru the tax treatment of TIPS and as a general rule I don't like to invest in things that that can't be explained, and understood by a 10 year old. I have looked at TIPS and they do not pass that litmus test, niether did morgage backed securities!